Fannie Mae 2009 Annual Report Download - page 60

be impaired, or the assets may be reduced in value if other market participants are seeking to pledge or sell
similar assets at the same time. We may be unable to find sufficient alternative sources of liquidity in the
event our access to the unsecured debt markets is impaired. See “MD&A—Liquidity and Capital
Management—Liquidity Management—Liquidity Contingency Planning” for a discussion of our contingency
plans if we become unable to issue unsecured debt.
A decrease in our credit ratings would likely have an adverse effect on our ability to issue debt on
reasonable terms and trigger additional collateral requirements.
Our borrowing costs and our access to the debt capital markets depend in large part on the high credit ratings
on our senior unsecured debt. Our ratings are subject to revision or withdrawal at any time by the rating
agencies. Factors such as the amount of our net losses, deterioration in our financial condition, actions by
governmental entities or others, and sustained declines in our long-term profitability could adversely affect our
credit ratings. The reduction in our credit ratings would likely increase our borrowing costs, limit our access to
the capital markets and trigger additional collateral requirements under our derivatives contracts and other
borrowing arrangements. It may also reduce our earnings and materially adversely affect our liquidity, our
ability to conduct our normal business operations, our financial condition and results of operations. Our credit
ratings and ratings outlook are included in “MD&A—Liquidity and Capital Management—Liquidity
Management—Credit Ratings.”
Deterioration in the credit quality of, or defaults by, one or more of our institutional counterparties could
result in financial losses, business disruption and decreased ability to manage risk.
We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual
obligations to us. The challenging mortgage and credit market conditions have adversely affected, and will
likely continue to adversely affect, the liquidity and financial condition of our institutional counterparties. Our
primary exposures to institutional counterparty risk are with: mortgage servicers that service the loans we hold
in our mortgage portfolio or that back our Fannie Mae MBS; third-party providers of credit enhancement on
the mortgage assets that we hold in our mortgage portfolio or that back our Fannie Mae MBS, including
mortgage insurers, lenders with risk sharing arrangements, and financial guarantors; issuers of securities held
in our cash and other investments portfolio; and derivatives counterparties.
We may have multiple exposures to one counterparty as many of our counterparties provide several types of
services to us. For example, our lender customers or their affiliates also act as derivatives counterparties,
mortgage servicers, custodial depository institutions or document custodians. Accordingly, if one of these
counterparties were to become insolvent or otherwise default on its obligations to us, it could harm our
business and financial results in a variety of ways.
An institutional counterparty may default in its obligations to us for a number of reasons, such as changes in
financial condition that affect its credit rating, a reduction in liquidity, operational failures or insolvency. A
number of our institutional counterparties are currently experiencing financial difficulties that may negatively
affect the ability of these counterparties to meet their obligations to us and the amount or quality of the
products or services they provide to us. Counterparty defaults or limitations on their ability to do business with
us could result in significant financial losses or hamper our ability to do business, which would adversely
affect our business, results of operations, financial condition, liquidity and net worth.
We routinely execute a high volume of transactions with counterparties in the financial services industry.
Many of these transactions expose us to credit risk relating to the possibility of a default by our
counterparties. In addition, to the extent these transactions are secured, our credit risk may be exacerbated to
the extent that the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover
the full amount of the loan or derivative exposure. We have exposure to these financial institutions in the form
of unsecured debt instruments, derivatives transactions and equity investments. As a result, we could incur
losses relating to defaults under these instruments or relating to impairments to the carrying value of our assets
represented by these instruments. These losses could materially and adversely affect our business, results of
operations, financial condition, liquidity and net worth.
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